OPEC Hawks Targeting $100 Oil Prices

If you have been listening to the news this weekend you probably heard some of the comments from various OPEC oil ministers saying $100 oil was a fair price. Fair to whom?

Many of the oil ministers from OPEC nations met in Egypt at the Arab OPEC conference (OAPEC). (No, contrary to common belief not all OPEC nations are Arab) At the conference those ministers were hunting up every microphone they could find to talk about $100 oil. The Libyan oil official told reporters that oil will rise to $100 soon because of market fundamentals. He claims speculation and unusual winter demand will cause the prices to continue rising. According to him $100 is a fair price for his oil. Libya currently produces 1.5 million barrels per day with a capacity of 2.0 million barrels. Libya is in no rush to produce more oil. They do not plan on issuing any new licenses in 2011 and will wait until prices rise even higher before auctioning off future parcels. It must be nice to be sitting on oceans of black gold that is rising in price every day and be in no rush to produce it.

The Libyan minister said OPEC compliance with the 2008 production cuts is around 60% and they were trying to force additional compliance. (wink, wink) He said OPEC would not meet again until June to discuss quotas and even with the rise in prices the market is well supplied.

He said the global economic recovery was uneven but demand was moving in the right direction. Global oil demand is actually expected to hit record levels in 2010 according to the IEA. That is assuming $3 gasoline does not slow the economic recovery.

Other OPEC ministers were also predicting $100 oil in 2010. Iran, Venezuela, Kuwait and Nigeria added their voices to the choir.

OPEC is not unified on this point despite the loud voices of the hawks. Qatar's oil minister said oil in the $80 is best for producers and consumers. Algerian's minister said oil is currently priced correctly and should remain in this "stable" range for months. Saudi's oil minister continues to claim the market is stable and prices in the $70-$80 range are fair. Some analysts wonder if Saudi will quietly produce more oil to push prices back to this stable range.

The UAE oil minister, speaking at the same conference, warned against OPEC setting prices through production quotas but adhering to the quotas was a good practice. Al Hamili said current oil prices do not reflect current fundamentals. He believes the current inventory levels are too high to support $90 oil. Finally an honest minister.

Former chief economist for CIBC World Markets was interviewed by The Star last week on triple digit oil prices. Rubin believes our world is about to get a lot smaller as triple digit oil prices force the reverse of globalization. He wrote a book last year about the coming end of cheap oil.

He said in the interview that two things really stand out in the recent IEA report on demand and production. About 80% of the oil the IEA expects the world to consume by 2035 has not yet been discovered. About 70% of the oil we are currently using will be depleted long before then. That means the amount of new oil discoveries needs to increase dramatically but annual discoveries have been declining since 1970. Geologists don't expect this trend to reverse.

Secondly, the IEA has never before acknowledged Peak Oil and always claimed there would be enough oil to meet demand. They have been ratcheting down that peak demand number quite dramatically over the last several years but at 105 mbpd in their current estimate they are still about 20 mbpd higher than currently levels. That is equivalent to adding two more Saudi Arabia sized countries to the supply in a depleting environment.

The IEA suddenly went from denying peak oil to claiming peak oil actually occurred in 2006. of course they qualified their statement saying "conventional oil" peaked in 2006. They don't consider oil sands, deepwater oil, gas to oil, coal to oil or shale oil as conventional. That way they can bow to the peak oil community and still hide behind their interpretation of the facts.

Regardless of what the IEA says the reality is still with us. That reality is that while the "oil markets are well supplied" as OPEC likes to say, there is an impending shortage of light sweet crude. That is the commodity we see quoted on every ticker and that is the commodity that will force gasoline prices to $4, $6 and eventually $8 per gallon. Don't believe what OPEC says. They want the world to believe there is plenty of oil until it is too late to do anything about it.

Jim Brown

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